IBC resolutions and haircuts

 

Crisis in Lakshmi Vilas Bank

Lakshmi Vilas Bank (LVB) is in the news, obviously, for wrong reasons. Last week, its officials were arrested by the Economic Offences Wing (EOW) for allegedly adjusting fixed deposits worth Rs.794 cr. placed by Religare Finvest Ltd towards the loans of RHC Holdings and Ranchem. And now in the AGM held on 25^th September 2020, the shareholders have rejected the appointment/reappointment of 7 directors including the Managing Director and also the appointment of Statutory Auditors. Only three directors’ appointments have passed the test of AGM.

LVB’s problems came out in the open with the publication of the financial results 2017-18. The bank which reported a net profit of Rs.256 cr. and Gross NPA of 2.67% (Rs.640 cr.) as on 31.03.2017 reported a net loss of Rs.584 cr. and Gross NPA of 9.98%(Rs.2694 cr.) as on 31.03.2018. The audited financials of 2017-18 also carried a qualified opinion of the statutory auditors about the adjustment of loan outstanding against third party deposits amounting to Rs.794 cr.@ I sent an e-mail to the then Managing Director as to whether the rights issue, which helped the bank to raise Rs.784 cr. (at a premium of Rs.112 per share) in Jan 2018, had disclosed  the alarming situation about the NPAs that is brewing and about the adjustment of third party deposits.  To the credit of the then MD, he immediately replied to my mail, though I felt that the reply was on standard lines and the shareholders were kept in the dark, while they applied for rights issue. The deterioration continued then onwards, as evidenced by the following figures

                                                                                                            (Rs. in cr.)

Particulars	2016-17	2019-20
Deposits	30553	21443
Advances	23728	13828
Investments	8652	5384
Net Profit	256	-836
GNPA(%)	2.67	25.39
NNPA(%)	1.76	10.04
CAR(%)	10.38	1.12*

*0.17 and Tier I is negative (-1.83) as on 30.06.20 @ treated as contingent liability and a provision of Rs.200 cr is held as on date

It is no surprise that the bank was placed under Prompt Corrective Action (PCA) by RBI in September 2019 for the high level of NPAs, continuous losses and inadequate capital. Immediately thereafter, the proposal of LVB to merge itself with Indiabulls Housing Finance Ltd was rejected by the regulator. Now the bank is in negotiation with Clix Capital (which has a loan book of Rs.1400cr. and Networth of Rs.1900 cr) and is believed to be inclined to give 49-50 percent stake to the latter in the merged entity. Again the proposal needs clearance by RBI.

In the above background, the bank is going through the fresh crisis of its AGM rejecting appointment/reappointment of 7 directors including the present MD & CEO and the Statutory Auditors as well.  Never in the recent past, has such a thing happened, especially since the name of the MD & CEO was cleared by the regulator. 

To find out how this had happened, I had a look at the share holding pattern in LVB. Out of 33.6 cr shares (for Rs.10 each aggregating Rs.336 cr), promoters hold 3 cr shares (6.8% of total shares), FII hold 3.5 cr. (10.45%) Insurance companies and other DII hold 2.61 cr (7.7%). More than 25 cr shares (75%) are with Non institutional investors - individual investors holding 14 cr. shares and body corporates holding 10 cr. (10 cr). 

In this well diversified portfolio of 33 cr shareholders, it was reported that promoters voted fully, Institutional Investors polled 99% of their votes and non-institutional investors including body corporates and individuals polled 62%. The approved resolutions include election of three independent directors. It is interesting to note some facts in the resolutions rejected and passed 

1.    MD & CEO whose appointment was rejected was functioning as CFO of LVB from April 2018.

2.    Two promoter group nominees were rejected.

3.    The three directors whose appointments were confirmed are

i)        Shri Shakti Sinha, IAS was with the central government and held positions including Principal Secretary (Finance & Power) and private secretary/joint secretary to Prime Minister

ii)         Shri Satish Kumar Kalra was an ex MD & CEO of Andhra Bank and was with Allahabad Bank before becoming an ED in Andhra Bank

iii)       Smt. Meeta Makhan, an ex-banker with 20 years’ experience in corporate and institutional banking.

In this period of COVID, AGMs are virtual meetings. The institutional investors as seen above hold only 6 cr. shares in their books.  Normally they exercise their voting rights. The same cannot be said about body corporates, who had 9 cr. shares.. The individual investors, who hold 14 cr. shares, normally do not vote in such large numbers. Definitely, some interested shareholders, who hold substantial stake, have taken the lead in pooling the votes in their favour.  What is their aim? Only time will tell.

The recent crisis is yet another vindication that corporate governance is after all not found in good measure in private sector also. It is much more pronounced in the financial sector space. Yes Bank, PMC, Mumbai, ICICI Bank (their ex MD & CEO being investigated for favouring a big corporate), IL&FS, DHFL, are some of the big names where absence of corporate governance was the prime reason for the wrong episodes. More than strong arguments with supporting facts will be needed if one has to counter if one comes up with a statement that the regulator is found wanting as it closes the stable door much after the horses have bolted. 

V.Viswanathan

29.09.2020